Pasubio - Non-Deal Roadshow Options - Model Update

All,

Please find our updated analysis on Pasubio post its Q1 results and non-deal roadshow here.

Pasubio, via Bank of America and Goldman Sachs, are holding a non-deal roadshow in London on Tuesday and Wednesday this week. This has led to several comments about a new imminent deal to refinance the September 2028 bonds. This has led to the bonds trading up to 97.5%, and discussions on an imminent refinancing trade. There is the possibility that the bond will be refinanced, but if so, the Company will have to increase the coupon from the current €+450bps offered on the existing bond.  

Investment Rationale:

- We are maintaining our 3% short position in Pasubio FRNs, which we initiated ahead of Q1 results in early May. We accept the risk that the bonds could be taken out via a refinancing, which would crystallise c.2.5pts of downside from current levels. Since Q1, the Company has drawn further on its RCF to fund the Luilor acquisition, which closed post-quarter-end.

- Pasubio has increasingly diversified into Fashion as its automotive exposure continues to weaken. LTM automotive revenue as of March is now €284m, lower than annual auto revenue in every year since FY16. This diversification has come at the cost of higher leverage, with net debt increasing to c.€380m pro forma as of March, from c.€340m in FY23 and FY24. We estimate leverage at 6.0x based on FY26 EBITDA expectations. 

- The key near-term downside risk is a refinancing, 2.5pts from current prices. However, the upside to the short remains significant. In the absence of a deal, we expect the market to refocus on an over-levered balance sheet, with yields drifting towards 15–18% (implying prices in the low-to-mid 80s). This process is likely to be gradual, but without refinancing, we would expect bonds to retrace back towards the low-90s initially.

Recent Results:

- Q1 P&L was in line with our expectations, while cash flow was better than forecast. Importantly, the core thesis for our short position, continued underperformance in the automotive segment, remains intact.

- Reported EBITDA met expectations, though this masked weaker gross profit and lower personnel costs relative to our model. Cash flow surprised positively due to a €14m working capital outperformance. Management attributed this to timing effects and reiterated that working capital typically builds in Q1 and Q3. Given the likelihood of a reversal in Q2, we have not adjusted our forecasts at this stage.

Roadshow Highlights:

- We listened to the roadshow presentation but have not received any feedback from the Q&As, which are currently ongoing. Management emphasised the strategic shift away from a pure auto supplier. While the fashion acquisitions appear to be of reasonable quality and may generate integration synergies, the presentation clearly illustrates the structural decline in the auto segment, with revenues now at a 10-year low.

- In automotive, Pasubio has recently won tenders expanding relationships with OEMs from single-platform to multi-year, multi-platform contracts. Supplier distress across the sector has supported order wins, although this has not yet translated into higher volumes.

- The OEM base remains concentrated, with Porsche, JLR, Bentley and BMW accounting for roughly two-thirds of automotive demand, up from 62% in 2021. While not material in isolation, this does raise questions around claims of OEM diversification, particularly against a backdrop of declining overall leather volumes as OEMs increasingly adopt alternative materials.

- In Fashion, Pasubio works with c.15 brands, but revenue is highly concentrated: Chanel (41%), Hermès (15%), Bottega Veneta (14%), Gucci (12%), and Dior together account for over 90% of segment sales.

- We also question the sustainability of the Company’s guided maintenance capex of c.1% of net sales. This appears extremely low versus history, where maintenance capex has not fallen below 3%, even before accounting for recent spending on acquisitions and new facilities.

Our thesis:

- Even allowing for recent acquisitions, Pasubio remains fundamentally an automotive supplier. On a pro-forma basis, over 75% of revenue and c.70% of EBITDA is still generated from the auto segment. With OEM volumes consistently declining over the past few years, Pasubio’s profitability remains highly correlated to the health of the automotive sector. The diversification into fashion provides some mitigation, but only to a limited extent.

- Secondly, we question the sponsor’s commitment to this strategic pivot. PAI Partners has not injected fresh equity capital to support these acquisitions, instead relying on rollover equity from vendors, resulting in dilution rather than balance sheet strengthening.

- Thirdly, we believe the level of EBITDA adjustments is aggressive. Adjusted EBITDA increases from €55m to €77m. Of this, €5–8m is clearly defensible, reflecting the neutralisation of the JLR shutdown following last year’s Q3 cyberattack and the annualisation of the Luilor acquisition. However, the remaining €12–15m appears optimistic and, in our view, will take time to deliver, if at all.

- As a result, we see the likelihood of a refinancing this summer as low and would expect bonds to trade off over the coming weeks. We are maintaining our short position.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk